Here is a groundbreaking way to reduce carbon emissions by 80% or more in almost any large building that is fully self-funded using standard financing metrics. This approach delivers comfortable, future-proofed multi-family residential and multi-tenant commercial buildings at lower cost to occupants than for similar buildings. It also delivers above-market utility-grade returns to developers and landlords AND can be mandated for all applicable buildings with minor adjustments to established regulatory frameworks.
Sound too good to be true? With technologies that are available today, all the pieces are already in place to begin implementing it immediately. Indeed, the barrier is not technology or cost, the challenge is changing the way people think about buildings and shifting industry stakeholders from entrenched and siloed positions. Arguably, the greatest shift has to come from local governments who profess to be committed to addressing climate change but, at the regulatory level, still hold on to views and relationships that get in the way of meaningful market transformation.
Overcoming the biggest barrier to reducing carbon emissions in large buildings
The single most persistent barrier to ultra-low carbon buildings is the “split incentive”. The split incentive arises when developers of large buildings have to pay extra to install low carbon technologies but have difficulty passing on those costs to the occupants who receive the benefit of future lower energy costs. Financing methods exist to address the split incentive (e.g. energy service contracts and third party loan guarantees). However, the fact is that almost no ultra-low carbon buildings have been built even though these methods have existed for decades.
The best way to overcome the split incentive is to separate the ownership of a building’s energy system from the ownership of the building itself. The way to do this is to create an independent in-building energy utility that will own the energy system for the life of the building. The in-building utility’s technical experts work with the project team when the building is still at the design stage to ensure that the most cost-effective carbon reduction technologies are installed in the building.
Here’s how it works. Let’s assume that the costs of these ultra-low carbon technologies add 5% to the total construction cost of the building. The utility agrees to pay the developer for 100% of those costs. The developer builds a much more efficient building than originally planned, but does not pay one penny more. The developer is happy.
When construction is complete, the in-building utility takes ownership of the energy system and begins charging the occupants for their energy consumption. Their total energy cost is the same or less than they would have paid for energy if there was no energy utility and they get to live in a healthy and comfortable building. Condo owners pay about 20% less for their management fees because the energy system maintenance and repair costs are eliminated. The occupants are happy.
By applying state-of-the-art technologies such as heat recovery systems, energy controls, in-suite metering, and even extra building insulation, the utility can reduce its carbon emissions and its energy input costs by 80% or more. We know this is feasible because a building in Seattle, pictured above and owned by the Bullit Foundation, is already achieving these kinds of savings using an in-building energy utility approach. Even if the utility charged 10% less than the going rate for its energy, it would still be able to generate a strong profit because its cost of energy would be 80% less than the going rate. The utility is happy.
Even after allocating funds for repairs, maintenance, capital asset replacement and administration along with a conservative contingency against risk, the utility would generate above market financial returns sufficient to attract a wide range of investors. The investors could include the developer, the building owner, the occupants, the local municipality or even traditional investment firms. The investors are happy.
So, by aligning the financial interests of all the stakeholders, the in-building energy utility can achieve dramatic GHG emission reductions without causing any stakeholder to pay more other than the happy situation where they are making an investment with a financial return. This model also works for existing building retrofits as well! The only drawback to this new approach is that it is such a current departure from the way we currently operate that it needs a truly visionary municipal leader or developer to try it and show that it will work in Canada just as well as it has already worked in the USA.
Could that visionary leader be at the conference? If so, I’d love to chat with you about it.